|At the risk of impersonating Chicken Little (I first began warning that the market was overbought in mid-May), complex bearish candlestick patterns together with the stochasticRSI momentum indicator are screaming "sell" on the weekly chart of the S&P 500 Index (SPX). Based on past accuracy of these signals, they should not be ignored. In the case of the charts below, not one false sell signal has been generated in the last 36 months when used in conjunction with the stochasticRSI.|
|The candlestick signals in Figure 1 were designed by combining the various bearish candlestick indicators in Metastock with a rising median price for each of the three weeks leading up to the candlestick pattern so that a signal was generated only if it was preceded by a three-week rise in the average price of the index. For example, here is the Metastock formula language for the Spinning Top:|
SpinningTop() AND Ref(MP(),-1)>Ref(MP(),-2) AND Ref(MP(),-2)>Ref(MP(),-3) AND Ref(MP(),-1)>Ref(MP(),-3) AND CLOSE>Ref(C,-3)
Anytime another indicator, such as the stochasticRSI, corroborates a complex candlestick signal, it becomes more powerful. It is another fact of technical analysis that the longer the period being used (eg. weekly versus daily) the more powerful the signal as well.
To increase the chance of winning, a signal should not be acted upon without a break in the trendline extending from the bottom of the large green rising window on March 21 to just below the low of the hanging man on June 10th.
|Figure 1 – Weekly chart of the S&P500 (SPX) showing complex bearish hanging man, spinning top and inverted hammer signals. Note that each time the weekly stochasticRSI (upper window) generated a sell signal in the last two years (see vertical dotted lines), the price of the index dropped significantly.|
|Graphic provided by: MetaStock.|
Figure 2 - Same chart of the weekly SPX but this time showing bearish candlestick patterns (blue diamonds) from the Nison Candlesticks Unleashed (NCU) plug-in for Metastock. Note that each time a signal was generated in the last two years, it was confirmed by a weekly stochasticRSI sell signal. Both Figures 1 and 2 generated sell signals for the week ending June 6, 2003.
|One final thought, the bears have dominated the past 36 months. Any coming correction will test whether they have gone into a long-term hibernation or are just napping. If this candlestick/stochasticRSI sell signal results in a brief retracement or sideways action and no significant drop results, it will be another convincing sign that market sentiment has changed for the better.|
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